RESTRICTED M Y R ey Report No.P -217 This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE ANONYME DES MINES DE FER DE MAURITANIE March 3, 1960 REPORT AND RECOfMENDATIONS OF THE PRESIDENT TO T-E EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE ANONYMlE DES MINES DE FER DE 1AURITANIE 1. I submit the following report and recommendations on a proposed loan of :166 million to the Societe Anonyme des Hines de Fer de Mauritanie (MIRMA) to assist in financing a project to mine and ship 6 million tons of high grade iron ore a year from deposits near Fort Gouraud in Mauritania. PART I - 11ISTORICAL 2. Late in 1957, T-IFER'TA asked the Bank for a loan to assist in fi- nancing its project to mine 6 million tons a year of high grade iron ore from deposits near Fort Gouraud and to transport the ore by rail to Port Etienne for shipment. At the same time, the French Government indicated its iTillingness to guarantee such a loan. After preliminary talks at the Bank, a mission studied the project in the field and in Paris during Harch and April 1958. A second mission reappraised the project in April 1959 and negotiations with representatives of the company began in Washington in December 1959. 3. When the TFERMIA project was first presented to the Bank, Mauri- tania was an Overseas Territory of France under the Constitution of the Fourth Republic and one of the eight territories that made up the Federa- tion of French Iest Africa. In the referendum of October 1958 on the Con- stitution of the Fifth French Republic, Mauritania elected to become a self-governing member of the new Community, as did the other territories of the Federation with the exception of Guinea, and shortly thereafter voted to become the Islamic Republic of Mauritania. The political ties between the members of the former Federation have been broken but, again with the exception of Guinea, they have retained a common currency and form a single customs area. As a member of the Community, the Islamic Re- public of Mauritania is entirely responsible for the conduct of its own internal affairs, the Community being responsible for external relations. So far as membership in the Bank is concerned, Mauritania, as a republic within the Community, is included in the membership of France. 4. The Bank has already made loans amounting to $352.1 million to borrowers in the Community. As of February 29, 1960, the status of indi- vidual loans was as follows: -2- Year Borrower Purpose Amount ($ million equiv.) 1947 Credit National Reconstruction $250.0 195h Office Central des Chemins de Fer de la France d'Outre-Mer Railway improvement 7.1 1955 Electricite et Gaz d'Algerie Electric power development 10.0 1959 Compagnie Miniere de 1'Ogooue Manganese project 35.0 1959 Societe Petroliere de Gerance Oil pipeline 50.0 Total net of cancellations 352.1 of which repaid 28.2 Total now outstanding 323.9 Amount sold 59.8 of which repaid 27.5 Net amount held by third parties 32.3 Net amount held by Bank 291.6 $29.1 million of the loan to Corpagnie Miniere de 11Ogooue is not dis- bursed and the 50 million loan to Societe Petroliere de Gerance, in which the Bank's own commitment is limited to $I25 million, is not yet effective. PART II - DESCRIPTION OF THE FROPOSED LOAN 5. The main characteristics of the proposed loan would be as follows: Borrower: Societe Anonyme des Mines de Fer de Mauritanie (IRFERA) Guarantors: (a) The Republic of France (b) The Islamic Republic of Mauritania Amount: The equivalent in various currencies of $66 million Interest rate: 6 1/ho,including 1% commission Commitment charge: 3/hfo Maturity: 15 years with amortization in 20 semi-annual payments beginning on January 1, 1966 and ending on July 1, 1975. Purpose: To finance a new iron ore mine near Fort Gouraud, Islamic Republic of Mauritania, a railway to transport the ore to Port Etienne and requisite port facilities. The proceeds of the loan would be used to pay for im- ported goods and services. -3- PART III - THE EPOJECT 6. A report "Appraisal of the NIRMA Iron Ore Mining Project, TO-225a, dated February 12, 1960 (o.'l), together with a supplement on "The Market for iron Ore in Western Europe, (No. 2), were distributed to the Executive Directors on February 25, 1960 (R6026). 7. The project consists of the exploitation of iron ore deposits near Fort Gouraud, Mauritania, at the rate of 6 million tons a year. The project is based on proven and probable open pit reserves of 94 million tons with an average iron content of 63%. Additional reserves of high grade ore are known to exist, but are still being explored. A large part of the investment will be in a 675 km. railway to carry the ore to Port Etienne, where stockpiling and loading facilities are to be installed. The railway would follow an all-Mauritanian route across generally ex- cellent terrain, although a tunnel would have to be driven through the Choum escarpment. Construction of the port and railway could begin with- in a few months after signing the proposed loan. The railway would take about four years to build and on its completion, say, early in 1964, the company would be in a position to mine and ship about 4 million tons of ore a year. With the addition of further mining and transport equipment, capacity would be increased by the end of 1968 to the full 6 million tons a year. 8. The final plan for the mine was prepared by the Societe Miniere et Metallurgique de Penarroya, a company with extensive mining experience. Penarroya will sign a contract with IMEFERTIA, already reviewed by the Bank, for continued technical assistance in the development and operation of the mine. 9. Procurement of t7oods and services would be on an international basis to the fullest extent practicable; invitations to bid on certain heavy mining and loading equipment may necessarily be lmited to manufac- turers with specialized experience. 10. The cost of the completed project, including initial working capital and interest during construction, is estimated at the equivalent of about $190 million. To reach the first stage of 4 million tons a year is expected to require about 511l million equivalent, a figure which in- cludes the cost of studies and preparatory work already carried out. The company proposes to finance this amount as follows: $ million equivalent Share capital (13.3 billion CFA francs) 53.9 Caisse Centrale loan (50 million NF) 10.1 French Treasury loan (105 million NF) 21.3 I.B.R.D. loan 66.0 151.3 & NF = New francs The approximately qP40 million required to finance the increase in capacity to 6 million tons a year is expected to be provided from funds generated by operations. 11. MIFERMA is a Mauritanian company. The capital stock is held by a large number of shareholders, French, British, German and Italian, of whom consumers of iron ore or their representatives hold somewhat over one half. The remainder is held by private French financial interests and by an agency of the French Government responsible for the promotion of min- eral exploration and development. For purposes of the Financial Aoreement (see para. 14 below), the shareholders have been formed into groups for whose financial obligations a leading shareholder is responsible. The shares held or represented by these guarantor-shareholders are as follows: British Ore Investment Corroration 20.00% USTINOR (French steel industry) 15.255 Finsider (Italy) 15,00% Gewerkschaft Exploration (Germany) 2.70% '11. de Rothschild Freres 19.90% Bureau de Recherches Geologiques et Hinieres (French Government) 27.15% 100.00% 12. The increase in share capital to 13.3 billion CFA francs has been authorized by the shareholders and will be subscribed in full immediately after signature of the proposed loan. The company has already signed a Loan Agreement with the Caisse Centrale de Cooperation Economique, a French Government credit institution, for a 30 year 50 million NF loan at 3%. The French Treasury has already undertaken to make available up to 105 million NF either by making a loan directly or by guaranteeing a public issue to be floated by IIFER1A. The amount of the Caisse Centrale loan would be re- duced by any savings in the cost of the railway that might be realized if the Choum tunnel were not built. Any other savings on the present estimates of the cost of the first stage of the project would reduce both the proposed Bank loan and the Treasury loan. 13. Consumer shareholders have signed commercial contracts with the company to purchase annually a minimum of 3 million tons of iron ore, with options to take up to 4.5 million tons, for the life of the proposed loan. MIFERMA intends to sell the remainder of its output on the open market and the results of the Bank's market study indicate that under normal business conditions the company should have no difficulty in disposing of its out- put at satisfactory prices. The income estimates indicate that the company should be able to operate at a profit from the start of shipments. 14. To protect the proposed loan against possibly severe short term fluctuatiorsin the demand for iron ore, the guarantor-shareholders have sig.ed a Financial Agreement with HIFERMt under which they would be re- sponsible, in the proportions indicated in paragraph 11 above,for providing any funds required to maintain the net working capital of the company at a level satisfactory to the Bank. They have also aZreed to make ;ood by way of advances, or other means, any shortfall in the resources referred to in paragraph 10 above. 15. The Financial Agreement further provides that: (a) if an individual guarantor-shareholder or a minority of guarantor-shareholders should fail to meet their obliga- tions to make advances as required under the Agreement, their shares would be surrendered for sale by NIFERMA for the account of the defaulting guarantor-shareholder, who would be liable in addition to pay a cash penalty. The remaining guarantor-shareholders would be severally liable to make good the shortfall in the advances re- quired by MIFERTA; (b) if, after the proposed loan had been completely drawn down or Y3IFERMA had begun operations, a majority of the guarantor-shareholders should decide not to meet further calls to maintain the working capital of 31FRMA, they would be liable to put up sufficient fundj to enable the outstanding balance of the loan to be repaid. Such pay- ments would be made to accounts opened in the name of the Bank and individual guarantor-shareholders would be dis- charged from their obligations under the Financial Agree- nent only when the Bank had received their shares of the several currencies due under the loan; (c) the guarantor-shareholders as a whole would be relieved of their obligations under the Financial AMreement if IFERMA were nationalized or a substantial part of its assets were exproprinted. Their obligations would be suspended if the production or export of on were made impossible for a period of at least six moKhs as a con- sequence of certain events constituting '.'ce rajeure'. Their obligations would be resumed in full .i. ronths after the cessation of the iforce na;-eurel 3ituation, un- less a substantial part of the installationshad been de- stroyed or their use made th,rr'oally impossible and IFEMIA had notified the Bank before the end of the six months grace period of a decision by the shareholders to wind up the company. (d) guarantor-shareholders would be free to transfer shares within their groups. Any other transfers would require the purchaser to be acceptable to the Bank and to adhere to the Financial Agreement, except in the case where the guarantor-shareholder making the transfer agreed to re- main bound under the Agreement for his original propor- tion as indicated in paragraph 11 above. - 6 - PART IV - LEGAL INSTRUJENWITS AHD AUTHORITY 16. The following legal documents are attached: (a) Draft Loan ,greement between MIFERMk and the Bank (No. 3) and draft letter from the Bank to a`ER!A laying down the criterion by which the Bank would judge a satisfactory working capital position (11o. 4); (b) Draft Guarantee Agreement between iepublic of France and the Bank (No. 5) and draft letter from the French Govern- ment regarding the assets of the Bank of France (No. 6); (c) Draft Guarantee Agreement between Islamic Republic of Mauritania and the Bank (No. 7). 17. The following features of the Loan Agreement are of particular interest: (i) The company would look to its shareholders for any addi- tional funds needed to complete the project and to provide initial working capital satisfactory to the Bank. Net working capital would include a liquid reserve equal to 6 months debt service on the proposed loan and the Caisse Centrale loan. (Section 105(b) and No. 4); (ii) Once operations began, if net working capital fell or threatened to fall below a level satisfactory to the Bank, the company would call on its shareholders to make good the deficiency. (Section 5.05(b)); (iii) Shareholders' advances made under (i) above would not be repa;able so long as any part of the loan were outstand- ing (Section .08(d)); advances made under (ii) above could be repaid at any time that the net workiny capital position permitted (Section 5.08(e)). Interest on share- holders' advances would not be payable before the start of commercial operations. (Section 5.08(c)); (iv) More generally, the company would make no payment to any of its shareholders if such payment wo-.ld reduce or threaten to reduce net working capital below a level sat- isfactory to the Bank. (Section 5.07); (v) The company would make no payment to shareholders at the exprnse of funds required in any year to finance the com- pletion of the project. (Section 5.08(a)); (vi) Dividends on share capital and founders shares would not be payable before the start of operations; thereafter dividend payments,including dividends on founders shares, in excess of 10% could be made only if an amount equal to the excess were applied to the repayment of the loan. (Section 5.08(b) and 5.08(c)); (vii) The event referred to in paragraph 15(b) would consti- 4uc an automatic e of default under the Loan Agree- ment (Section 6.02); the Bank would open an account or accounts into which the guarantor-shareholders would make the payments referred to in paragraph 15(b). (Sec- tion 5.06); (viii) To take account of the events referred to in (a) and (c) of paragraph 15, an additional event of default (1) has been included in Section 5.02 of Loan Regulations No. 4, as amended by Schedule 3 of the Loan Agreement. 18. The two Guarantee Agreements are drafted in comparable terms so far as it is practicable. Each agreement refers to the existence of the other but each guarantor remains individually responsible. The Mauritanian Guarantee Agreement provides that the government will enable MIFERMiA to acquire all land needed for the project (Section 3.06), and will not interfere with the successful construction and operation of the project (Section 3.07). The Mauritanian Guarantee Agreement contains the standard negative pledge clause (Section 3.01). The French Guaran- tee Agreement (Section 3.01) contains the modified form of negative pledge employed on the occasion of previous French loans to take account of the position of the Bank of France (see No. 6). Authorization to sign the French Guarantee Agreement will be given by an Arrete of the Minister of Finance as in the case of the last four French loans; no legislative action is required. The Mauritanian Assembly has already authorized sig- nature of the Guarantee 'greement, subject to subsequent ratification. 19. Loan Regulations No. 4 have been modified to take account of the existence of two guarantors and the establishment of the Community. Under Section 5.02(j), any action by the Community which would interfere with the construction or operation of the project or the performance by the Borrower or either of the 3uarantors of their respective obligations would be an additional event of default. PART V - ECONOIUC BACKGROUND 20. A report on the Economy of Mauritania, No. EA-107a dated Feb- ruary 18, 1960, (No. 8), was distributed on February 25 (R60-26). 21. The economy of auritania at the present time is rudimentary and the severity of natural conditions sets narrow limits to the expan- sion possible in the traditional sectors of production. Except in the valley of the Senegal river, which marks the southern boundary, and in a few favored oases, there is too little water for any but the most un- certain crops and over the remainder of the country small and widely scattered herds of livestock are driven sometimes great distances in the persistent search for food and drink. People are poor, few in number and thinly dispersed; there are few centers of any importance. Internal trade is largely limited to the traditional exchange of cereals and vegetables for livestock products. Exports consist in the main of cattle driven on the hoof to markets further south and imports are confined to a few basic commodities. Mauritania is heavily dependent on foreign aid to cover its chronic budget deficits and to finance investment. 22. In comparison with the present economy, the IFERMA project is immense - an investment of perhaps six times the national income, with a potential production of iron ore at least five times as great in value as all exports from Hauritania now. The port and mine townships would be important new markets for livestock and fish, but elsewhere the tradition- al economy would not be directly affected, if at all. In the first in- stance the main impact will be on the budget; taxes and royalties of nearly '5 million equivalent a year soon after the start of operations should dramatically reverse the present chronic budget deficits and pro- vide Mauritania with a unique opportunity to stand on its own feet. The Government is planning to seize this opportunity and is adopting policies favoring foreign investment. The treatment accorded to MIFERMA is a good augury. 23. PIFEMA would so overshadow the rest of the economy that the ability of Mauritania to guarantee a loan to the company is inseparable from the success of the project. In the event of failure, it is barely conceivable that Mauritania would be able to meet the service of the pro- posed loan without outside help. In the last resort, therefore, the Bank would have to look to the guarantee of France. 24. A report on the Economy of France (EA 98A), dated June 22, 1959 (R59-52), was distribubed in connection with the loan to the Compagnie Miniere de 1'Ogooue (COILCG). At that time, the stabilization undertaken at the end of 1958, decisively reinforcing measures taken a year earlier, was already proving strikingly effective. When the loan to the 3ociete Petroliere de Gerance (SOPEG) was presented for consideration by the Ex- ecutive Directors in December 1959, it was possible to report a continued improvement. Prices and wages had been held within bounds and industrial production and employment were again increasing. It now appears that the gain in output for 1959 as a whole was as much as 5%, that is, about the same as in the previous year. Despite continued heavy expenditures in Algeria, the Treasury position and the balance of payments have been transformed. The foreign trade accounts were approximately in balance in 1959, for the first time since the end of the Second World War, and France was able to make substantial prepayments on her external debt. The re- serve position has continued to improve and reserves had risen to about $1,750 million by the end of January 1960. France has still to face heavy debt service payments over the next few years, about $265 million falling due in 1960 and 285 million in 1961. These payments would not, however, exceed 8% of foreign exchange earnings from exports at the current rate. (The figures given do not include a repurchase obligation to the Interna- tional Monetary Fund of 3181.2 million, of which 350 million is to be re- purchased during 1960 and the balance in the course of 1961). Her past debt record and the fundamental improvement in her economic situation give every assurance that France will be able to meet her obligations as well as the additional borrowing that is now contemlated. PART VI - COXPLIAFCE THT ART7CLES OF AGREEMT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. The Report of the Conmittee provided for in Article III, Section 4 (iii) of the rticles of Agreement is attached (No. 9). PART VII - RECOETh;NDATIONS 26. I recommend that the Bank make a loan to the Societe Anonyme des Mines de Fer de Mauritanie (MLFM'A), guaranteed by the Republic of France and by the Islamic Republic of Mauritania, in an amount of $66 million or the equivalent in other currencies for a total term of 15 years, with interest (including commission) of 6 -% per annum, and on such other terms as are specified in the attached draft Loan and Guar- antee Agreements and that the Zxecutive Directors adopt a resolution to that effect in the form attached (No. 10). Eugene R. Black Attachments Washington D.C. March 3, 1960